By Mark E. Rosen

Elements of a South China Sea Deal: Saving Face and Making Money

The
Permanent Court of Arbitration’s ruling against China on July 12, 2016 drove a
stake into the heart of China’s narrative that it had historic rights to nearly
all of the South China Sea and could prevent its neighbors from fishing in
their EEZs and for drilling for oil and gas in their continental shelf areas. The
arbitral tribunal also issued a very strong rebuke of China’s island building
activities, prompting China to lash out against a number of countries; most
notably, the United States, Australia, Japan and also South Korea (although
China is also upset with South Korea for its announcement to deploy THAAD in
defense against North Korean missiles).

In
early August, it appeared that China was on a collision course with Japan. Both
countries have a vigorous dispute over the Diaoyu/Senkaku Islands and China was
incensed by Japan’s statements both supporting the arbitral ruling and publicly
urging China to comply. On August 1 China
held a significant live fire drill in the East China Sea that included the
firing of “dozens” of missiles and torpedoes. There were also reports that six Chinese
coast guard vessels and over 200 fishing vessels swarmed in the vicinity of the
Diaoyu/Senkaku Islands. On August 7, Japan
reported that it had issued multiple protests to China after it found that
China had installed ocean surveillance radar “facilities” on a number of its
offshore gas platforms. Finally, there are continuing reports of China’s deployment
of its maritime militia of
fishing vessels in contested areas in the East China Sea.

Since
the dust up in the first week of August, things seem to have calmed down in
both the South China Sea and especially the East China Sea. China continues to
exercise in the Sea of Japan and
the Bering Sea, but there is nothing to indicate that this is intended as a provocation
to Tokyo. China hosted a port visit for the USS Benfold on
August 8, and China played host to the G-20 meeting on September 4-5 in the
resort city of Hangzhou. Former Philippine President Fidel Ramos has had informal
discussions in Hong Kong with Chinese officials;
although follow-on talks were placed on hold on
September 28 for unspecified reasons. This is significant because shortly after
the tribunal ruling, China had indicated that it would not engage
in talks that were based on the ruling. And since access to
diminished fisheries is at the core of the South China Sea dispute, it is also
important that on August 15, China’s Agriculture Minister Han Changfu told
China National Radio that China would be trimming its
fishing fleet because of the near collapse of fisheries
in the East China Sea and South China Sea.

There
are multiple reports that China puts a great deal of emphasis on its stature
vis-à-vis other G-20 members and for the body to not become a venue to engage
in a fractious debate over the South China Sea. During
the 10-nation ASEAN summit in Laos which concluded on September 8, President Barack
Obama and other leaders gingerly raised the question of
compliance with the arbitration ruling and voiced
concerns about the presence of new Chinese vessels in the vicinity of
Scarborough Shoal; but, at least there was an acknowledgement by China that
there was an issue and a willingness to work with the other claimant states. Lastly,
and perhaps most importantly, there is extensive reporting of a feud between
Philippine President Rodrigo Duterte and President Obama over Duterte’s human’s
rights record. This led to a cancellation of a
meeting between the two leaders at the margins of the ASEAN Summit
in Laos on September 8. There were speculations that Duterte would be visiting
Beijing and Moscow to seek inexpensive arms without “strings attached.” There
were also talks that Duterte would be discontinuing
joint patrols with the US in extended areas of the
South China Sea, in the hopes that he could improve relations with China. For
its part, Japan has indicated that it will join the US in conducting
patrols in the South China Sea as well as to follow through with its plans to
supply the Philippines and Vietnam with patrol craft. The Japanese announcement
of increased patrols in the South China Sea drew a fresh warning from China
that Japanese engagement in US’ freedom of navigation operations (FONOPs) would cross a Chinese
“red line.”

The
question, then, is whether China is simply on its best behavior to not spoil the
afterglows of the G-20 and ASEAN Summits in which it emerged relatively
unscathed, or whether their recent conciliatory tone means that they have put
the arbitration ruling behind them and are ready to cut a deal with the Philippines
and perhaps others.

Assuming
a deal is in the making, can China can use trade or economic levers to get
other countries to back down and support their territorial claims in the South
China Sea or exact concessions in a negotiation process. Can China “peel off”
weaker states like the Philippines and wreck the legal and political value of
the arbitration ruling? Also, what kind of deal is appropriate? Some US
academics suggest that a US-China grand bargain or a “staged process” to
establish a US-China balance of power is a precondition for peace in the
region. Or, as argued here, will a legal deal establishing a joint development
regime and disengagement from illegal maritime assertions solve most of the
current problems?

Can the
Philippines Do a Deal with China and Ignore the US and Others?

It
is much too early to see whether Duerte’s scheme to play off the United States
against China will have any staying power. Oh Ei-sun, a senior
fellow with the S Rajaratnam School of International Studies in Singapore,
suggests that Duerte can afford to be more “severe and colorful” against its
longtime ally the United States and that, in the end, Duerte is playing this
game to obtain concessions from the US in its foreign aid package. China itself
may be reluctant to take
the bait since it would be most embarrassing for China to
supply arms to the Philippines and have those arms later used against its
warships or law enforcement vessels.

Chinese
analysts have incorrectly asserted that the US goaded the Philippines in taking
the arbitration action against China and that the US left the Philippines
“holding the bag” when the decision was rendered. The facts are that the
Philippines had been physically prevented from accessing rich fishing areas
adjacent to their coast or exploiting potential hydrocarbons in the vicinity of
Reed Bank and they needed a way to level the playing field with China since
they lacked the economic or military clout to resist Chinese aggression. To be
sure, virtually all Western states agree that it is infinitely better for
states to pursue remedies in the courts rather than the battlefield; however,
the decision to prosecute the action was a Philippine sovereign decision. When
the decision was announced in July, a good many countries including the US, Australia, Japan,
France, and the EU supported the ruling and more or less
urged China to conform to the findings because these states operate their
diplomacy and economic relations using the principles of international law.

Eventually,
the Philippines will do the math. China is the Philippines’ second largest overall
trading partner (valued at 13.6 percent) and its trade with Hong Kong (reported
separately) pushes this total to about 20 percent. Japan and the US alone
account for 36 percent of the Philippine export economy and this amount gets
much higher if countries like Singapore and the EU (which accounted for another
10.7 percent of bilateral trade in 2015) are included in the totals. That does
not tell the entire story. Much of the Philippine economy is dependent on USD 26
billion in remittances from land based workers overseas and seafarers. The US is by far the
largest source of remittances to the Philippines;
however, the UK, Singapore,
Japan, Canada, Germany, and Australia are all major remittance sources and were
also supporters of the arbitral ruling. Lastly, the Philippines is currently
dependent upon development aid from the World Bank, Asian Development Bank, the
United States, and Japan; the amount was upwards of USD 5 billion in 2011 and
likely much higher today. The US and Japan in particular have stepped up their military and
economic aid, in part, to compensate for the Philippines’ loss of economic
assistance (mostly in the form of development loans) from China that stopped when
the arbitration action was commenced.

While
most countries would never retaliate if the Philippines were to negotiate an
arrangement with China in which it allowed China, for example, to have a
fractional share of its fisheries or offshore hydrocarbons, an agreement that appears
either confiscatory or which violates basic UNCLOS norms would likely be met
with strong opposition in the US and among other Western countries. More
precisely, if the Philippines and China were to jointly agree to simply engage
in joint production, that sort of agreement would likely be respected by the US
and other Western powers. If, on the other hand, the Philippines conceded key
legal points in the arbitral decision and, for example, acknowledged Chinese
sovereignty over waterspace in either the Spratlys or Scarborough Shoal, then the
US, Japan, Vietnam, Australia, France, EU, and other countries would be
unlikely to accept such an outcome and would likely try to put pressure on the
Philippines to conform the outcome to international law using foreign aid
grants as leverage. More likely than not, most of that pressure would come from
Tokyo and Washington to not enter into an agreement with China which either, in
the case of the US, puts its Treaty relationship or base access rights at risk
or, in the case of both parties, concedes important legal points in the arbitral
ruling.

Can China Use
Trade to Avoid a Deal or Exact Concessions for the West?

Shortly
after the tribunal ruling, China’s Deputy Minister of Trade was careful to
encourage Chinese citizens to not boycott US and Philippine goods; however,
that does not mean that sanctions and boycotts are off the table as a means for
China to exact concessions. China has, in the past, threatened sanctions
against US companies that sell defense equipment to Taiwan, and forced those
companies to choose between Taiwan’s and the PRC’s market which is 20 times
larger and which would affect large US companies including Wal-Mart, Apple,
MasterCard, and Starbucks. Were China to retaliate, it would probably employ
China’s non-tariff barriers to frustrate US, Japanese, and others’ exports to
China, or, as has been often suggested, pull its investments out of the US
market including its purchases of US treasuries.

China
would be foolish to upset bilateral trade and investment patterns with the US or
its regional allies because in 2015, China amassed a USD 365 billion
merchandise trade surplus with the United States. Chinese businesses have put
this cash to good use, investing in new plants and equipment, educating its
young people abroad, and investing billions in the US and other safe offshore
markets. This is not unique to the US; China has a global trade surplus of USD 600
billion. It continues to have small trade deficits with Japan and South Korea
and its principal imports are electrical and industrial machinery (no. 1 and
3), oil (no. 2), and ores (no. 4). These few figures strongly suggest that
China is highly dependent on international trade to fuel its economy. China’s
offshore investments of its US trade surplus helps China to diversity its
holdings outside of Asia. China is also heavily reliant on international
supplies of the raw materials which it lacks and risks a great deal by starting
a trade war in which it is deprived of access to the US and other foreign markets.
According to one excellent analyst at the Carnegie Council:

Unlike the United
States, which generally has scant economic relations with the countries it
wishes to sanction (Iran, Syria, North Korea), China is dependent upon market
access, technological transfer, and capital provision from many of the wealthy
nations in Europe and North America that it seeks to sanction.

China
has used unilateral sanctions in the past. According to one excellent study, since
“1949 China’s
leaders have repeatedly politicized economic relations providing
aid or refusing trade in support of broader … objectives.” In 2000, China
banned all imports of South Korean mobile phones and polyethylene in
retaliation for Seoul’s increase of duties on Chinese garlic. In 2010, Chinese customs
officials halted the shipments of rare earth minerals destined for Japan (for use in hybrid cards, wind turbines, and guided
missiles) as a form of protest against the detention of a Chinese fisherman
caught fishing near the Senkakus. The United States has also been victimized by
China’s extensive unfair trade practices prompting the US, within the WTO
system, to file a record number of suits against China in the WTO on behalf of US poultry
producers and is now considering the unilateral institution of a total ban on
Chinese steel imports because of price fixing and other illegal
actions by Chinese steel producers.

In
the short term, China still has legal room to maneuver should it wish to impose
national security controls or erect non-tariff barriers to restrict imports
from Japan, the United States, or the Philippines; or, as it has done in the
past, incite its public to boycott products from certain countries. If China
chose to go down this path, it would do as it has done in the past and target
individual companies like Boeing or the US
movie industry or, in the case of the allies, Philippine
fruit and Japanese consumer electronics. China knows that WTO cases are very
time consuming to document and litigate. But, that same legal maneuver space
can also be exploited by the United States and others to frustrate Chinese
exports.

The
use of embargoes to restrict its exports or limit its purchases overseas is
another area where China might lash out. But, if China were to stop buying
Australian ore or Japanese finished products, the world economy is sufficiently
diverse to compensate for some of these losses and, if China deprived itself of
imported technology from Japan and raw materials from Australia, it would then not
be able to supply Walmart’s thirst for their inexpensive products. And, even
though the data is not complete, Forbesreported that
China’s recent “hardcore diplomacy” is bad news for globalization — which
favors China — and investors in Chinese businesses. Of note, the two-year
performance of Chinese index funds is in negative territory: -7.43 percent in
contrast to positive returns for Japanese and Philippine index funds, which are
at 2.41 percent and 4.92 percent respectively.
More hardening of China’s position is likely to push yields in the
Chinese economy even lower.

The
notion that China can use its foreign investment dollars to intimate states is
greatly overblown. Beginning in 2009, China
greatly increased its overseas direct investment activity for the simple reason
that it had lots of foreign currency (mostly dollars) that it earned as a
result of exports and it needed a place to park those funds. The large Chinese
stake in US public debt (20 percent foreign owned) is often cited by
politicians as the US’ Achilles heel; the notion being that China could cause
US interests rates to skyrocket if it stopped buying US debt. In reality China
buys US sovereign debt because they need to. US treasury debt is safe, liquid,
and can be used by China to finance dollar denominated international transactions
(such as oil). China’s central bank also buys US sovereign debt to maintain the
exchange rates for the renminbi, help drive down the costs of Chinese exports,
and to avoid inflation
in its domestic economy. Also, the reality is that US
sovereign debt is overwhelmingly held by US domestic entities (66 percent);
such that were China to dump its nearly USD 1 trillion in US debt, that debt
will simply be purchased by domestic and foreign purchasers, as happened in
August 2015 when China reduced its US debt holdings by USD 180 billion. For
China, the impact of “a broad scale dump of US Treasuries…would be that China
would actually export fewer goods to the
United States.” [Scott Miller, CSIS].

Given
China’s extreme dependence on international trade to fuel its domestic growth
and investment, it would be almost suicidal for China to engage in actions that
would result in the closure of its foreign export markets. Likewise, a
government-led boycott of foreign products would, apart from the legal
repercussions, have extremely destructive impacts on its economy since it
relies heavily on imports of agricultural products to feed its people (from the
US), modernize its factories (Japan and Korea), medically care for its people
(US, Japan) and fuel its manufacturing (Australia). Dumping US debt would cause
some angst in the US but, in the long run, US debt instruments would be
purchased by investors in the US and other countries. More importantly, dumping
US dollars would seriously undermine China’s ability to
defend its currency and use those dollars to finance their
imports of oil which is priced in dollars.

What About a
US-China Grand Bargain as a Precursor?

Writing
for the Carnegie Endowment, Michael Swaine argues
that much of the current tensions in the South and East China Seas are symptoms
of a lack of a stable balance of power between the United States and China. He
makes a thoughtful case that Xi Jinping is determined to develop a regional
power structure that is more Sino-centric and which will displace the United
States’ influence in the overall process. He also discusses the theory that
China’s hard-nosed behaviors in the Western Pacific are designed to undermine
US and allied resolve and create “no go” zones. In 2016 testimony before the
House Foreign Affairs
Committee, Prof. Amitai Etzioni similarly argues that the US
and China share many interests and, presumably, much of the current tensions would
subside if there was the negotiation and conclusion of some sort of “grand
bargain” in which the US might, for example, commit to not establishing any new
military commitments in countries in the region (read: Vietnam), and begin to “gradually
phase out existing commitments.”

These
are interesting ideas; however, one must legitimately ask the question of
whether the current instability in the South and East China Seas is really
about the United States or, to put it another way, whether China has any interest
whatsoever in this kind of dialogue. It is not implausible to think that China
is much more pragmatic in its thinking and that its tough behavior is designed
to weaken the negotiating positions of the Philippines and Japan so that, in
the end, it can negotiate an agreement that the Chinese government can take to
its people and remain in power. This type of pragmatic approach by China can be
gleaned in a recent book by former Treasury Secretary Henry M. Paulsen, the
former President and COO of Goldman Sachs who, among other things, was
extremely successful, on behalf of Goldman, in launching major privatization
efforts and initial private offering of a number of PRC enterprises. Paulson,
who had the ear of high PRC officials including Xi Jinping, and was a trusted
member of their economic inner circle, had this to say about what is really
important to the Chinese leadership in Dealing
With China:

Since the 1972
rapproachment our relations with China had been determined by security
concerns. That emphasis was a natural by-product of Cold War politics…the world
has changed dramatically…Economic concerns were now paramount to the Chinese… [p.
183]

Of
equal importance to the primacy of economic concerns, was the method by which
China would approach important policy decisions and its negotiations with the
outside world (in this case foreign banks and investors). According to Paulsen,
the Chinese like to meet prominent Americans because high level meetings confer
status among their peers. And, “the point wasn’t to have substantive
discussions. As I leaned in China, the meeting itself was the substance.” Once
the relationship was established and the parties moved to substance, Paulsen
reported that he frequently had to work in gray areas because, once the
relationship was established, there was a lot of pressure to conclude the deal
(and establish order). He continues:

Deals often had to
be completed before the country had put in place laws and regulations that had
not been necessary in the days of centrally controlled planning…It was then and
remains to a great extent today a nation ruled by men, not laws. Trust and face
were uppermost; you had to trust that if the Chinese committed to do something
they would deliver… [p. 80].

The
point to be gleaned from Paulsen’s valuable experiences at Goldman Sachs is
that China is probably less concerned with the precise outcome of a negotiation
between itself and its neighbors but places more value on how it will be
perceived internally and by its trading parties. Paulsen suggests that China
places value in reestablishing economic order in the region and resuming normal
trading patterns given that China is very much an export driven economy and
maintaining full employment and relative prosperity is foremost on the minds of
China’s leaders. Therefore, for a South China Sea deal to work, it must make
economic sense and China must not lose face vis-à-vis its past positions on the
Nine-Dash Line and its assertions of sovereignty over many South and East China
Seas features. These specific attributes are necessary:

The arrangement
would need to make good economic sense for China so that President Xi Jinping
can “sell it” to the Communist Party Central Committee and the public at large
i.e., the deal would guarantee China access to fisheries and potential
hydrocarbon areas;

If another
country, like the Philippines, receives an advantage in terms of access to
fisheries or hydrocarbons, that advantage needs to be structured in such a way
so that China can argue that it is retaining a strong equity position in the
resulting deal and that benefits to its regional neighbors will strengthen its
regional trading relations and overall regional goodwill;

The deal needs to
be delinked from the arbitration decision so that China can essentially argue
that this is their own joint development proposal versus an outgrowth of the
court decision;

The deal should
not directly assault Chinese assertions of sovereignty over any of the features
on which it is currently occupying.

The Elements of a
South China Sea Deal that the Philippines, Vietnam, and Their Western
Supporters Could Support

Even
though Paulsen makes the point that Chinese negotiators like to work on the
basis of good faith and trust, any sort of joint development scheme would have
to take into account the specific territories in dispute and the fish in the
water. That is not to imply that the scheme would endeavor to determine sovereignty.
Determining sovereignty would be a fool’s errand given that virtually all of
the claims in the South China Sea are based on slim historic evidence and
limited periods of post-WWII occupation. Besides, many fail to appreciate that
the features in the South China Sea themselves are mostly meaningless; legally.
The importance of the features comes from the size of the maritime entitlement
that the feature creates. Thus, the key to the deal is to render moot the
question of sovereignty over the rocks, shoals, reefs, and islets and focus
instead on blocks of waterspace and the resources therein.

Addressing
the contested territories that were affected by the tribunal decision is a
logical first step; particularly from the standpoint of the United States and
the Philippines because it addresses physical areas in which there are
potential military tensions, takes the US-Philippines Mutual Defense Agreement
out of play, and helps the Philippines to regain access to important natural
resources. It is proposed that this be done in two phases and which results in
the establishment of two Joint Development Zones: the Spratly Island and
Scarborough Shoal development zones. When and if these zones are successful,
additional zone agreements which encompass territories claimed by Malaysia in
the Southern Spratlys and the Paracels could be attempted between the PRC and
other claimant states.

Phase I, Part 1: Central
Spratly Development Zone

“After the South
China Sea Arbitration” urged that China enter into immediate
negotiations with the Philippines, Taiwan, and Vietnam (in exchange for
suspension of the arbitral proceedings) to establish a joint development zone
with Taipang/Itu Aba at the center because it was the largest feature in the
Spratlys. Affording Itu Aba special status no longer makes any sense given that
the arbitral panel ruled that that Itu Aba (Taiwan) and other large features
like Thitu/Pagasa (occupied by the Philippines) are not considered islands
within the meaning of Article 121 of UNCLOS. This actually makes the task of
creating a zone much easier since it equates Itu Aba and Pagasa with the less
robust high tide elevations within the Spratlys, including Cuarteron Reef,
Fiery Cross Reef, Johnson Reef, and McKennan Reef. Given that none of the
features rate an EEZ, there is no reason to given precedence to one feature
over the other; all are either rocks or low tide elevations. It logically follows
that a first step would be to establish a Central Spratly Development Zone
(CSDZ) which encompasses most of the contested high tide or low tide elevation
features inside much of what the Philippines claims as the Kaliman Island Group
(KIG — depicted by the line PD 1596). This methodology of including only
contested features inside the KIG claim is to ensure that negotiators only have
to deal with resource sharing among four parties, the Philippines, Vietnam,
Taiwan, and China, through the full extent of the Zone.

The
CSDZ is predicated on the notion that inside the zone each state would be legally
considered a condominium wherein each would have an undivided interest in the
zone’s fisheries and hydrocarbons (if applicable). Inasmuch as the arbitral panel
has determined that none of the features in the Spratlys are considered islands
within the meaning of Article 121 of the UNCLOS, it is far easier for the
claimant states to agree to forgo, for the time being, any maritime zones — including
territorial seas — associated with any of the features since none are
sufficiently robust to qualify for an Exclusive Economic Zone (EEZ). However,
all features would get a 500M safety zone for navigational safety purposes.

Development
within the CSDZ would be frozen. All states would continue to “sit” on the
features that they are currently occupying but no unilateral enhancements are
permitted to any of the current outposts if the enhancements could impact the
marine environment or increase the footprint of the existing installations. China
would, for example, be allowed to remain on the low tide elevations (such as
Mischief Reef) and the Philippines on Second Thomas Shoal but both would not be
permitted to expand or improve these “outposts” and both would have to subscribe
to a “do no harm” environmental protection code. Moreover, the documents
establishing the CSDZ would explicitly state that no aspect of the CSDZ
arrangement either confers title on any one of the parties or enhances a
country’s claim to sovereignty over any of the features based on a theory of
prescription. One last point: all countries would agree that after a short
transitional period of a few years, all military forces would be removed from
the outposts and the facilities would be repurposed as marine resource
protection installations which would be open to legitimate researchers and
personnel involved in the administration of the CSDZ.

Perhaps
the most difficult aspect of the CSDZ arrangement is to determine the size of
each party’s share and who would enforce the agreement. As previously
recommended, a third party should be selected to act as the Administrator of
the CSDZ. That party needs to have sufficient capacity to put ships into the
area to monitor fishing and oil and gas activities and has credibility with the
various states. Both Singapore or Indonesia have sufficient maritime capacity
to act as the administrator of this arrangement since neither has a national
stake in any of the claims yet both have sufficient professional maritime
forces to monitor activities in the zone.

Various
methodologies could be used to determine the shares among the various states. The
relative size of each country’s coastline bordering the South China Sea is one
approach; however, that would seriously disadvantage Taiwan which has the
largest feature (Itu Aba) in the zone. An allocation based on the amount of
territory actually occupied would unduly favor Taiwan and the Philippines and
disadvantage both Vietnam and especially China. Finally, an allocation based on
population or some economic measure would greatly favor China and especially
harm Taiwan. In the end, the most equitable methodology would be to simply
allocate access to fisheries based on an ¼ pro-rata basis. In other words, each
country would be licensed to fish in any of the waters in the CSDZ beyond each
feature’s 500-meter safety zone up to ¼ of the catch. Catch amounts would be
monitored by the administrator.

The
contested areas in the South China Sea are not projected by the U.S. Department of
Energy to be endowed with substantive oil and gas resources.
This projection is based on unspecified “industry sources” versus cited seismic
studies. Since the possibility of hydrocarbons cannot be excluded, the CSDZ
arrangement should permit any one, or group of claimants, to undertake seismic
activities anywhere within the CSDZ after securing a permit from the administrator
to ensure there is monitoring of the exploratory drilling activities and no
damage to the marine environment. To incentivize states to engage in this
prospecting, the state that finances the prospecting and drilling is entitled
to a development fee of 50 percent of the total take from any drilling and the
remaining 50 percent would be split among the CSDZ zone states. (This sharing
arrangement is modeled after the system in place for deep seabed mining).

Phase I, Part 2: The
Reed Bank/Scarborough Shoal Development Areas

The
second major unsettled issue is the status of Philippine access to Reed
Tablemount/Bank which is a submerged feature northwest of the proposed CSDZ. This
is an area of great
interest to both countries and has been a site of past oil
and gas exploration activities in the 1970s and 2011. Most recently, PRC patrol
boats threatened to ram seismic survey vessels belonging to the UK firm Forum
Energy that had received a license from the Philippine government to engage in
offshore seismic surveys. The PRC allegedly claimed that the seismic activities
were illegal since Reed Tablemount (only 80 miles west of Palawan Island) was
within the claimed 9 Dash Line region. In any event, no exploratory oil and gas
actions have taken place since then. The tribunal effectively ruled that Reed
Bank is part of the Philippine Continental shelf and that China was unlawfully
interfering with the Philippine’s rights to exploit the living and non-living
resources in that large (8866 Sq. KMs) and shallow area.

Scarborough
Shoal (a large triangular shaped atoll 120 miles West of Luzon) is another
feature that is claimed by both countries because of rich fisheries. The tribunal
ruled that Scarborough Shoal is a high tide elevation that is enclaved within
the Philippine continental shelf/EEZ and that China is unlawfully preventing
the Philippines from fishing nearby. The tribunal did not decide which country
had the better claim to title over Scarborough Shoal. Nor did the tribunal address Taiwan’s
perfunctory claim on the features which are
derivative of the PRC’s and which Taiwan has never prosecuted.

China’s
claims to these features (Huangyan Island) are based on its Nine-Dash Line (9DL)
and some evidence of Chinese fishing in the area. The 9DL aspect of their claim
was thoroughly repudiated by the arbitral panel as both unrecognized by and
incompatible with UNCLOS. And, while historic fishing in the vicinity of Scarborough
might give rise to China to argue that it has a claim to fish in the vicinity
of Scarborough under the concept of historic rights (See, Article 15 and 62 and
123 of UNCLOS), none of these provisions would result in China gaining title to
Scarborough Shoal’s features. At most, these provisions in UNCLOS and the case law (Tunisia/Libya ICJ (1982)] could support a claim by the PRC to be entitled to
fish inside of the Philippine EEZ near Scarborough Shoal.

Assuming
China sooner or later wants to end up at a place where it is nominally within
the bounds of international law, China could quietly retreat from its current
position of excluding Philippine fisherman from the waters around Scarborough
Shoal and move instead to negotiate a joint fisheries management and use
agreement governing fishing inside of the Atoll and twelve nautical miles
seaward of the rocks. The two parties would agree to joint fisheries patrols
or, in the alternative, the embarkation of officials from the other state on
their fisheries enforcement vessels and commit to take action to eject any
unlicensed fishing vessels from the area. Additionally, the Philippines would
publish coordinates that licensed Chinese fishing vessels could use to enter
the Philippine EEZ to transit to the fishing areas. The two parties would each
have the right to 50 percent of the catch and both would commit to modern
fisheries management schemes to ensure that fish stocks remain viable.

Reed Bank

The
second portion of the Reed Bank Scarborough Shoal Development scheme would
involve China acquiescing to the right of the Philippines to develop the
offshore hydrocarbon resources in the vicinity of Reed Bank. Since the
Philippines currently lacks indigenous capability to develop these offshore
resources, then China would be given the right of first refusal to bid on the
exploration and exploitation of these offshore tracts and use Chinese oil companies
(with the participation of Philippine oil and gas companies in joint venture)
to develop the tracts. While the Philippines would, in the end, be able to
realize the royalties from the development of these resources; the right of
first refusal scheme would enable China to be able to have the primary right,
after the Philippines, to gain access to this resource and also have meaningful
participatory rights in the development of this important resource. Obviously,
if Chinese oil companies have, in combination with a Philippine partner,
exclusive development rights, it still stands to realize significant profits
when market conditions are favorable.

This
joint development approach forces both parties to concede small portions of
their legal positions. As was seen in the landmark legal case between Myanmar
and Bangladesh, the practical effect
of the decision was that Myanmar gained surety of title
as a result of the legal proceedings and was able to then entice Western oil
and gas producers to enter the Myanmar market (mostly closed before to oil and
gas development) and make the investments needed to develop the resources. Even
though neither state got 100 percent of what they wanted, each got enough to be
able to claim victory to their public and, more importantly, attract investment
capital to their countries. The exact same thing can be said about the above
arrangement. The Philippines is trading some fish and offshore development
rights in exchange for stability and a management scheme that will assure the long
term sustainable management of the resources. China, on the other hand, is
gaining access to sources of hydrocarbons and protein.

Conclusion

In
June 2014, Chinese President Xi Jinping made a number of speeches before
domestic and international audiences commemorating China’s “Five Principles of
Peaceful Coexistence” that were conceived by India’s President Jawaharlal Nehru
and Chinese Premier Zhou Enlai. These principles later became the intellectual
foundation for the so-called Non-Aligned or G-77 movement. The principles
include:

Mutual Respect for Territorial Integrity and
Sovereignty

Mutual Non-Aggression

Mutual Non-Interference in Each Other’s
internal affairs

Equality and cooperation for Mutual Benefit

Peaceful Co-existence

It
is extremely difficult for China to square its current behavior vis-a-vis its
neighbors with these five pillars of its foreign policy. Its relations with
Vietnam, Singapore, Korea and Indonesia can best be characterized as strained
and the security situation with Japan and the United States could spiral out of
control if there is a serious incident at sea involving military units. The
recent upbeat talk by Philippine President Duterte of being able to cut a deal
with China doesn’t mask the fact that there is a great deal of “bad blood”
between the two countries. It is because China, in effect, established an
economic blockade of the Philippines including such items as foreign aid,
bilateral trade, and physical access to important economic areas on the
Philippine continental shelf. This latter point is not lost on the world
community who view China as the clear aggressor because the Philippines is
geographically disadvantaged in terms of natural resources as well as lacking
in economic or military capacity to confront China on an equal footing.

The
proposed zonal arrangements conform to all of these principles. First, since
sovereignty is neither acknowledged nor conceded and the principle of mutual
recognition is upheld. Besides, those policy analysts who argue that China, and
other countries, have a great connection to the South China Sea features
ignores the fact that for centuries the features were plotted on maps so that
mariners could avoid them. No native residents or farmers are being displaced. None
of these features, until very recently, were regarded as home to anyone except
fish and sea birds and these arguments of historical connection are mostly
after the fact rationalizations to justify the seizure of property. Second, the
zone arrangement — especially the provisions dealing with demilitarization of
the features — upholds the principle of non-aggression and peaceful coexistence
which is also, parenthetically, a founding principle of ASEAN. Third, the zone
arrangement is something which is completely offshore. Some Chinese workers
might participate in fishing or oil and gas activities and some Chinese
consumers will benefit from the fish that are caught, but essentially there is
nothing in this agreement which impacts the internal affairs of China or its
internal legislation. Fourth, showing respect for Philippine access to the
resources off their coast will demonstrate, to the outside world and Chinese
population, that the PRC can “walk the walk” when it comes to treating small,
less powerful states, with respect and equality. In the long run, this will
benefit the public perception of China among smaller ASEAN states and should
work to their advantage, politically and economically. Fifth, establishing
joint development zones should result in a lessening of the risk of a military
incident in the South China Sea and promote the goal of peaceful co-existence.
Obviously, if the results of the zone were generalized to the East China Sea,
and China and Japan made an agreement regarding the Diaoyu/Senkaku Islands, it would lessen tensions even more.

In
closing, it useful to draw again from the relevant observations from Hank
Paulsen who was incredibly successful in dealing with China as both a leader of
Goldman Sachs and the United States Treasury Secretary. Paulsen forcefully
makes the case that China usually has the same goals as the United States when
it comes to their economy and foreign policy: reform, political stability, and economic
development. Yet, the two countries have a “stunning ability”
to misunderstand one another in part because
the US does not follow the mandate of “equality and trust” in its dealings with
the Chinese leaders. For these zone proposals to make sense, the United States
needs to engage China’s leadership as the highest levels and convince China
that the US is only interested in a durable arrangement that addresses the
political and economic interests of all the South China Sea claimants while at
the same time help to advance China’s highest domestic priority of continued economic
growth. That
will only come from stable political and economic relations in the Western
Pacific.

(The views expressed in this paper
are those of the author alone and do not represent the views of CNA Corporation, George Washington
School of Law or any of their sponsors.)